The Trouble with Housing Policy

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James K. Galbraith argues that expanding homeownership is a good and proper policy route for helping working families to increase wealth. George Fredrickson made a similar point in a recent New York Review of Books essay, “Still Separate and Unequal,” where he discussed the vast wealth gap between white and black Americans, and argued that historical disparities in homeownership were to blame:

How did this vast inequality come about? It was mainly the result of the greater white access to home mortgages that were insured and subsidized by the federal government. Before the 1930s a home buyer had to put down 50 percent of a house’s price and could get only a relatively short-term mortgage, perhaps only ten years. By the 1950s, as a result of a series of federal housing programs, including the GI Bill, most Americans could get long- term mortgages—up to thirty years— with a down payment as low as 10 percent. By 1984 seven out of ten whites owned their own homes, worth on average $52,000. But only one in four blacks owned a home, worth, on average, less than $30,000. …

The advantages of whites over blacks … were more characteristically Northern than Southern; they manifested themselves in the growth of virtually all-white suburbs outside the major cities and virtually all-black ghettos within them. This new form of racial segregation was not simply the product of private choices, among them the refusal of white home-owners to sell to blacks, blockbusting and the racial “steering” of home buyers by real estate agents, and the personal prejudice of bankers asked to approve loans for blacks.

The urban segregation that has contributed so much to the persistence of black inequality came about in large part because between the 1930s and the 1970s federal housing agencies refused to approve mortgage loans in neighborhoods that were “redlined,” which meant property values were deemed uncertain because of the presence of blacks.

True enough. All the same, modern-day housing policy to correct this imbalance sometimes seems pretty painfully misguided. The Bush administration, like its more liberal predecessor, has made a point of offering subsidized mortgages to low-income and especially minority families, which is a great idea in theory, as Galbraith’s and Frederickson’s pieces might suggest. But so long as homes remain unaffordable for 80 percent of all renters, including 21 million renters who couldn’t get mortgages under even the loosest of underwriting standards, these sorts of policies will only go so far.

Lower-income families that can afford homes, meanwhile, often end up with units in need of costly repairs or are located in poor neighborhoods plagued by crime and unemployment. Not the best way to create wealth, obviously, or reduce the inequality and segregation Frederickson’s talking about. In Baltimore a few years ago, reporters discovered that homes basically falling apart were being “patched up” and sold to low-income families at inflated prices. In the South, 40 percent of low-income home-buyers were steered into trailer parks on leased land. Not to mention the fact that extending homeowner credit to low-income and/or minority neighborhoods usually opens the door to predatory lenders to walk on in.

Plus, it’s not even clear that owning a home is always a fantastic wealth-enhancing strategy for low-income families. It’s true that the median wealth of low-income homeowners is 12 times that of renters with similar incomes, and most of that comes from the home. But renters and owners tend to be very different people to begin with, at different stages of the life cycle, in different financial situations. How “good” of an investment owning a home is often depends on when an owner enters the market, how long it holds the property, local market conditions, etc. On the downside, some low-income families who buy a home can quickly find themselves assailed with all sorts of costs—insurance costs, property taxes, utility bills—and often borrow against the equity of their home in a financial pinch, erasing any wealth.

That’s not to say Galbraith or Frederickson are on the wrong track; clearly they know what they’re talking about. Still, we hear about policies to promote homeownership—from both parties—as a strategy for helping working families, but they deserve far more scrutiny. It’s troubling, for instance, that the percent of mortgage loans that end in foreclosure have risen from 1.24 in the 1990s to 1.46 these days—a potential sign that people are being steered into homes before they’re ready. A proper housing policy, perhaps, would increase the stock of affordable housing and help out low-income renters until they’re ready to own a home. What we have now, unfortunately, is a national housing policy primarily intended to benefit lenders—who, these days, depend on sub-prime loans to low-income families for profits—while slashing rental-assistance programs like Section 8.

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